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2011

104th Annual Report

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Goals and responsibilities of the Swiss National Bank

Mandate

The Swiss National Bank conducts the countrys monetary policy as an

independent central bank. It is obliged by Constitution and statute to act

in accordance with the interests o the country as a whole. Its primary goal is

to ensure price stability, while taking due account o economic developments.

In so doing, it creates an appropriate environment or economic growth.

Price stability

Price stability is an important condition or growth and prosperity.Ination and deation, by contrast, impair economic activity. They complicate

decision-making by consumers and producers, lead to misallocations o

labour and capital, result in income and asset redistributions, and put the

economically weak at a disadvantage.

The SNB equates price stability with a rise in the national consumer

price index o less than 2% per annum. Deation i. e. a protracted decline in

price levels is considered to be equally detrimental to price stability. The

SNB takes its monetary policy decisions on the basis o an ination orecast.

Implementation o monetary policy

The SNB implements its monetary policy by steering liquidity on the

money market and thereby inuencing the interest rate level. The three-monthSwiss ranc Libor serves as its reerence interest rate. In addition, since

6 September 2011, a minimum exchange rate or the euro against the Swiss

ranc has also applied.

Cash supply and distribution

The SNB is entrusted with the note-issuing privilege. It supplies the

economy with banknotes that meet high standards with respect to quality

and security. It is also charged by the Swiss Conederation with the task o

coin distribution.

Cashless payment transactions

In the feld o cashless payment transactions, the SNB provides

services or payments between banks. These are settled in the interbankpayment system (SIC system) via sight deposit accounts held with the SNB.

Asset management

The SNB manages the currency reserves, the most important component

ofits assets. Currency reserves engender confdence in the Swiss ranc,

help to prevent and overcome crises, and may be utilised or interventions in

the oreign exchange market.

Financial system stability

The SNB contributes to the stability o the fnancial system. Within the

context o this task, it analyses sources o risk to the fnancial system,

oversees systemically important payment and securities settlement systems

and helps to promote an operational environment or the fnancial sector.International monetary cooperation

Together with the ederal authorities, the SNB participates in

international monetary cooperation and provides technical assistance.

Banker to the Conederation

The SNB acts as banker to the Conederation. It processes payments

on behal o the Conederation, issues money market debt register claims

and bonds, handles the saekeeping o securities and carries out money market

and oreign exchange transactions.

Statistics

The SNB compiles statistical data on banks and fnancial markets,

the balance o payments, direct investment, the international investmentposition and the Swiss fnancial accounts.

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Swiss National Bank

104th Annual Report 2011

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Preface

Ladies and Gentlemen

In accordance with art. 7 para. 2 o the National Bank Act (NBA), the

Swiss National Bank (SNB) submits an annual accountability report to the

Federal Assembly in which it outlines how it has ulflled its mandate

as defned in art. 5 NBA. Furthermore, pursuant to art. 7 para. 1 NBA, the

SNB submits its fnancial report to the Federal Council or approval, beorepresenting it, together with the Audit Boards reports, to the General Meeting

o Shareholders or approval and attention.

The frst part o the SNBs 104th Annual Reportcomprises the account-

ability report to the Federal Assembly (pp. 996). This is submitted to the

General Meeting o Shareholders or inormation purposes only, and does not

require approval. It describes the economic and monetary developments in 2011

and explains in detail how the SNB has ulflled its statutory mandate in

particular the conduct o monetary policy and the SNBs contribution to the

stability o the fnancial system. A summary o the accountability report is

provided on pp. 1013.

Like the years beore it, 2011 was shaped by the repercussions o thefnancial crisis which shook the world economy in 2008/2009. The pace o

global economic recovery slowed. In addition, the European sovereign debt

crisis and fscal problems in other advanced economies undermined confdence

on international fnancial markets. Against this backdrop, the Swiss ranc

appreciated urther in the frst hal o the year. In the second hal, the

appreciation gathered pace. This resulted in a massive overvaluation o the

Swiss ranc, posing an acute threat to the development o the real economy

in Switzerland and carrying the risk o deation.

The SNB maintained its expansionary monetary policy in 2011. In

August, it began taking measures to counter the strength o the Swiss ranc

by lowering the rate o interest between its regular quarterly monetary policyassessments and signifcantly increasing liquidity on the Swiss ranc money

market. As a result, total sight deposits at the SNB reached a historical peak,

and money market interest rates declined to around zero at times even

dipping into negative territory. Given the high degree o uncertainty on the

fnancial markets, however, the upward pressure on the Swiss ranc intensifed

once again at the beginning o September. Thus, on 6 September, the SNB set

a minimum exchange rate o CHF 1.20 per euro. It made it clear that it would

enorce this minimum rate with the utmost determination and was prepared

to purchase oreign currency in unlimited quantities or this purpose. It con-

sidered that, even at that rate, the Swiss ranc was still high, and announced

that it would take urther measures i the economic outlook and the risk odeation so required.

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Owing to the deterioration in the international economic environment

and the Swiss ranc appreciation, economic growth in Switzerland lost consid-

erable momentum over the course o 2011. In industries strongly ocused on

exports, value added decreased, and towards the end of the year, unemployment

rose again slightly or the frst time in two years. The downward pressure on

consumer prices was reected in the act that, rom October onwards, annual

ination turned slightly negative.

The second part o theAnnual Reportcomprises the fnancial report or

the attention o the Federal Council and the General Meeting o Shareholders

(pp. 99197). It includes the business report, which deals with organisationaland operational developments at the SNB as well as its fnancial results. The

fnancial report also includes the annual fnancial statements o the SNB

(parent company), containing the balance sheet, income statement and notes

(pp. 125166), fnancial inormation on the stabilisation und (pp. 167176),

and the consolidated fnancial statements (pp. 177194), as required under

Swiss law.

In 2011, the annual fnancial statements o the SNB (parent company)

closed with a proft o CHF 13.0 billion, ollowing a loss o CHF 20.8 billion in

the previous year. The positive annual result was driven mainly by valuation

gains on gold holdings and a net proft on oreign currency positions.

The distribution o proft by the SNB is contingent on the result o theparent company. With the annual result or 2010, the value o the distribution

reserve turned negative. Consequently, a review o the agreement on the distri-

bution o the SNBs proft was carr ied out by the SNB and the Federal Depart-

ment o Finance. The new agreement o 21 November 2011 covers the proft

distributions or the fnancial years 20112015. The annual distribution now

amounts to CHF 1 billion, and will be made only i the distribution reserve is

not negative.

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For 2011, ollowing the allocation to the provisions or currency re-

serves, the SNB is distributing CHF 1 billion to the Conederation and the

cantons in accordance with the agreement.

The stabilisation und shows a proft o USD 1.1 billion or the 2011

fnancial year. The loan granted by the SNB decreased rom almost CHF 12

billion to CHF 7.6 billion.

The stabilisation und contributed CHF 0.4 billion to the consolidated

result, bringing the annual consolidated proft to CHF 13.5 billion.

On 9 January 2012, Philipp M. Hildebrand resigned rom his ofce as

Chairman o the Governing Board. From that date, Thomas J. Jordan, Vice Chair-man o the Governing Board, took over as acting Chairman.

We wish to thank the bank authorities and our employees or their

hard work and valuable support over the past year, which presented excep-

tional challenges.

Berne and Zurich, 2 March 2012

Hansueli Raggenbass Thomas J. JordanPresident o the Bank Council Vice Chairman o the

Governing Board

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Contents

Preface

9 Accountability report

10 Summary 14 1 Monetary policy

42 2 Implementation o monetary policy

56 3 Ensuring the supply and distribution o cash

59 4 Facilitating and securing cashless payments

63 5 Asset management

72 6 Contribution to fnancial system stability

85 7 Involvement in international monetary cooperation

92 8 Banking services or the Conederation

93 9 Statistics

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99 Financial report100 Key fnancial fgures or the 2011 business year

103 Business report104 1 Legal ramework

105 2 Organisation and tasks

107 3 Corporate governance

112 4 Resources

115 5 Changes in bank bodies and management

117 6 Business perormance

125 Annual nancial statements of the Swiss National Bank(parent company)

126 1 Parent company balance sheet as at 31 December 2011

128 2 Parent company income statement and appropriation o proft or 2011

129 3 Changes in equity (parent company)

130 4 Notes to the annual fnancial statements o the parent company

as at 31 December 2011

165 5 Report o the Audit Board or the General Meeting o Shareholders

167 Financial information on the stabilisation fund168 1 Introduction

169 2 Stabilisation und balance sheet and income statement

171 3 Notes to the fnancial inormation on the stabilisation und

as at 31 December 2011

177 Consolidated nancial statements178 1 Consolidated balance sheet as at 31 December 2011

181 2 Consolidated income statement or 2011

182 3 Changes in equity (consolidated level)

183 4 Notes to the consolidated fnancial statements as at 31 December 2011

193 5 Report o the Audit Board or the General Meeting o Shareholders

195 Proposals of the Bank Council197 Proposals o the Bank Council to the General Meeting o Shareholders

199 Selected information200 1 Chronicle o monetary events in 2011

202 2 Bank supervisory and management bodies, Regional Economic Councils

206 3 Organisational chart

208 4 Publications211 5 Addresses

212 6 Rounding conventions and abbreviations

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8SNB

Contents

Accountabilityreport

10 Summary

14 1 Monetarypolicy

14 1.1 Mandateandmonetarypolicystrategy

17 1.2 Challengesformonetarypolicy

18 1.3 Internationaleconomicdevelopments 24 1.4 EconomicdevelopmentsinSwitzerland

34 1.5 Monetarypolicyin2011

42 2 Implementationofmonetarypolicy

42 2.1 Backgroundandoverview

43 2.2 Monetarypolicyinstruments

46 2.3 CollateraleligibleforSNBrepos

48 2.4 Liquiditymanagementandimplementationofminimumratein2011

53 2.5 Emergencyliquidityassistance

53 2.6 Minimumreserves

55 2.7 Liquidityinforeigncurrencies

56 3 Ensuringthesupplyanddistributionofcash 56 3.1 Background

56 3.2 Ofcesandagencies

57 3.3 Banknotes

58 3.4 Coins

59 4 Facilitatingandsecur ingcashlesspayment s

59 4.1 Background

60 4.2 TheSICsystemin2011

62 4.3 TARGET2-Securities

63 5 Assetmanagement

63 5.1 Background

64 5.2 Investmentandriskcontrolprocess 66 5.3 Changesinandbreakdownofassets

68 5.4 Riskprole

70 5.5 Investmentperformance

72 6 Contr ibutiontonancialsystemstability

72 6.1 Background

72 6.2 Mainactivitiesin2011

73 6.3 Monitoringthenancialsystem

75 6.4 Measurestostrengthennancialstability

77 6.5 Oversightofpaymentandsecuritiessettlementsystems

79 6.6 Internationalcooperationonnancialmarketregulation

81 6.7 Stabilisationfund 85 7 Involvementininternationalmonetarycooperation

85 7.1 Background

85 7.2 InternationalMonetaryFund

89 7.3 BankforInternationalSettlements

90 7.4 OECD

91 7.5 Technicalassistance

92 8 Bankingser vicesfortheConfederation

93 9 Statistics

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Accountabilityreport

9SNB

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SNB 10 Accountabilityreport

On8March2012, the Governing Board of the Swiss National Bank

(SNB)submitteditsaccountabilityreportfor2011totheFederalAssemblyin

accordancewithart.7para.2oftheNationalBankAct(NBA).Thereport,

whichisreproducedbelow,issubmittedtotheFederalCouncilandtheGeneral

MeetingofShareholdersforinformationpurposesonlyanddoesnotrequire

theirapproval.

Summary

(1)TheNationalBankpursuesamonetarypolicyservingtheinterestsof

thecountryasawhole.Itmustensurepricestability,whiletakingdueaccount

ofeconomicdevelopments.TheSNBsmonetarypolicystrategyconsistsofthree

elements:adenitionofpricestability,amedium-termconditionalination

forecast,and,atoperationallevel,atargetrangeforareferenceinterestrate,

whichistheLibor(LondonInterbankOfferedRate)forthree-monthinvestments

inSwissfrancs.On6September2011,theSNBalsosetaminimumexchange

ratefortheeuroagainsttheSwissfranc.

Liketheyearsbeforeit,2011wasshapedbytherepercussionsofthenancialcrisiswhichshooktheworldeconomyin2008/2009.Thepaceofglobal

economicrecoveryslowed.Inaddition,theEuropeansovereigndebtcrisis

andscalproblemsinotheradvancedeconomiesunderminedcondenceon

nancialmarkets.Giventhissituation,theSwissfranccontinuedtoappreciate

inthersthalfoftheyear.InJulythisappreciationacceleratedfurther,to

theextentthatthesubstantialovervaluationbecameanacutethreattoprice

stabilityandrealeconomicdevelopmentinSwitzerland.

Theincreasingdeteriorationintheinternationalenvironmentweighed

heavilyontheSwisseconomy.AverageannualGDPincreasedby1.9%,after

ariseof2.7%inthepreviousyear.Whiletherstsixmonthsof2011saw

dynamiceconomicdevelopment,growthslackenedinthesecondhalfoftheyear.Aconsequenceofthiswasaslightriseintherateofunemploymentin

thelastfewmonthsoftheyear.

TheSwissfrancappreciationandtheslowingoftherealeconomyled

todecliningpricesinthesecondhalfoftheyear.In2011,theconsumerprice

indexroseby0.2%onaverage,asagainst0.7%theyearbefore.Thedownward

pressureonconsumerpriceswas reected inthefact that, from October

onwards,annualinationdippedintonegativeterritory.

Monetarypolicy

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The SNB pursuedan expansionary monetary policy over the entire

courseof2011.Inthersthalfoftheyear,itkeptthetargetrangeforthe

three-monthLiborat0.00.75%,andaimedforaLiborinthelowerpartofthe

range.AspartofmeasurestakenagainstthestrengthoftheSwissfrancin

August,theSNBnarrowedthetargetrangeto0.00.25%,andaimedtokeep

the three-monthLibor ascloseto zeroaspossible. At the sametime,the

National Bank signicantly increased the supply of liquidity to themoney

market.Since,however,theSwissfranccontinuedtoappreciate,on6September

theSNBsetaminimumexchangerateatCHF1.20pereuro.ThesemeasuresweretakeninresponsetotheacutethreattotheSwisseconomyandtherisk

ofdeationarydevelopmentsoriginatingfromthemassiveovervaluationof

theSwissfranc.TheSNBemphasisedthatitwouldenforcethisminimum

ratewiththeutmostdeterminationandwaspreparedtobuyforeigncurrency

inunlimitedquantities.Atitsmonetarypolicyassessmentsof15September

and15December,theSNBreafrmeditscommitmenttotheminimumex-

changerate.

(2)TheSNBimplementsitsmonetarypolicybymanagingliquidityon

themoneymarketandtherebyinuencingtheinterestratelevel.Itsreference

interestrate isthethree-monthSwissfrancLibor.Since6September2011,

theSNBhasbeenpreparedtobuyforeigncurrencyinunlimitedquantities,ifnecessary,toenforcetheminimumexchangerate.Inthersthalfoftheyear,

excessliquiditywasslightlyreducedbymeansofliquidity-absorbingrepo

transactionsandtheissuanceofSNBBills.InAugust,thebankssightdeposits

attheSNBweresignicantlyexpandedinthreesteps,aspartofthemeasures

aimedatcounteringthestrongSwissfranc.Tothisend,withimmediateeffect

repotransactionswhichfellduewerenolongerrenewed,theissuanceofSNB

Billswassuspended,andoutstandingSNBBillswererepurchased.Inaddition,

foreignexchangeswapsandliquidity-providingrepotransactionswerealso

carriedout.Consequently,thelevelofthesightdepositsreachedahistorical

high.Theverysignicantincreaseinthesupplyofliquiditypushedinterest

ratesonthemoneymarketclosetozero.Attimes,ratesevendippedintonegativeterritory.

(3)ThroughthebanksandSwissPost,theSNBsuppliestheeconomy

withbanknotesandcoins,thelatteronbehalfoftheSwissConfederation.

Some local cash redistribution is carried out through the cantonal banks,

actingasagenciesonbehalfoftheSNB.AttheendofJanuary2011,theBasel

agencywasclosed.InFebruary,theSNBalsodecided toclose the Geneva

branchofcethelastoftheeightoriginalregionalbrancheseffectivefrom

theendofJanuary2012.Thesemeasureswereinresponsetotheongoing

trendtowardscentralisingcashdistributionservices.Tobestfacilitatecash

supply and distribution in the Geneva area, the SNB decided to open an

agencyattheGenevacantonalbankwitheffectfrom1February2012.

Implementationofmonetarypolicy

Cashsupplyanddistribution

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12 AccountabilityreportSNB

Unexpectedtechnicalproblemswereencounteredinanearlyproduction

stageofthenewbanknoteseries,whichhavedelayedtheissueofthenewseri es

byatleastoneyear.

(4)TheSNBfacilitatesandsecuresthefunctioningofcashlesspayment

systems.Itmaintainssightdepositaccountsforthebanks,steerstheSIC

interbankpaymentsystemandparticipatesintherelevantpaymentcommit-

tees.In2011,atopicofparticularrelevancewaswhetherinthefuturethe

SwissfrancshouldbeincludedinTARGET2-Securities,thesecuritiessettlement

systemdevelopedbytheEuropeanCentralBank(ECB).FollowingnegotiationswiththeECBanddiscussionswiththebanks,aswellaswithSIXGroupLtd,

as operator of the Swiss nancial market infrastructure, the SNB decided

againstmakingtheSwissfrancavailableasasettlementcurrency.

(5)TheSNBsassetsfullimportantmonetarypolicyfunctions.They

consistmainlyofgoldandforeigncurrencyassets(currencyreserves)and,to

alesserextent,ofassetsinSwissfrancs.Theirsizeandcompositionaredeter-

minedbytheestablishedmonetaryorderandtherequirementsofmonetary

policy.Attheendof2011,theSNBsbalancesheettotalwasCHF346billion,

whichwasCHF76billionhigherthanoneyearearlier(CHF270billion).The

increaseismainlyduetotheforeigncurrencyreserves,whichincreasedby

CHF62billionasaresultofinvestmentsinconnectionwithforeignexchangeswapsagainstSwissfrancs,valuationgains,andforeigncurrencypurchases.

Themostimportantriskfactorsforthecurrencyreservesareexchange

ratesandthegoldprice.Owingtotheincreasedlevelofthesereservesand

higher volatility,theirriskexposure has risen considerably. Asa resultof

valuationgainsongoldandonforeigncurrencyinvestments,aswellascurrent

earningsontheseassets,returnsonthecurrencyreserveswerepositive.

(6)TheNBAconfersontheSNBthemandateofcontributingtothe

stabilityofthenancialsystem.Indoingso,itworksinclosecooperation

withtheSwissFinancialMarketSupervisoryAuthority(FINMA),theFederal

DepartmentofFinance(FDF),aswellasforeignauthoritiesandinternational

organisations.In2011,theSNBwasactivelyinvolvedinimplementingthetoobigtofailrecommendationsofthecommissionofexpertssetuptoexamine

waysoflimitingeconomicrisksposedbylargecompanies.Alegislativepro-

posaltothiseffectwaspassedbyparliamentin2011.Onmacroprudential

oversight,theSNBwasinfavouroftherapidintroductionofacountercyclical

capitalbuffer.Aspartoftheoversightofsystemicallyimportantpaymentand

securitiessettlementsystems,theSNBassessedcompliancewiththeregu-

latoryrequirementsandmonitoredanumberofprojectsundertakenbythe

systemoperators.

Cashlesspaymenttransactions

Assetmanagement

Financialsystemstability

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TheSNBloangrantedinautumn2008tothestabilisationfundtotake

overilliquidassetsfromUBSwasfurtheramortisedin2011,andthefunds

overallriskfurtherreduced.

(7)TheSNBparticipatesininternationalmonetarycooperationac-

tivities.Importantbodies are the International Monetary Fund (IMF), the

BankforInternationalSettlements(BIS),theFinancialStabilityBoard(FSB)

andtheOrganisationforEconomicCo-operationandDevelopment(OECD).IMF

lendingtomembercountriesineconomicdifcultiesreachedarecordhighin

2011.WithregardtoSwitzerlandsparticipationintheupcomingincreaseinIMFquotas,theFDFdraftedafederaldecreewhichwillbevotedoninparlia-

mentin2012.Duetostrongdemandforloans,theIMFalsodecidedtoexpand

theNewArrangementstoBorrow(NAB).Thisexpansionbecameeffectivein

March2011.FortheSNB,theexpansionoftheNABmeantanincreaseinits

maximumloancommitmentfromCHF2.2billion(1.5billionSpecialDrawing

Rights,orSDRs)toCHF15.7billion(SDR10.9billion).Switzerlandalsopledged

CHF720million(SDR500million)toaugmenttheIMFsPovertyReductionand

GrowthTrust.TheloantothisfundisgrantedbytheSNBandguaranteedby

theConfederation.

(8)TheSNBprovidestheSwissConfederationwithbankingservicesin

theareasofpaymenttransactionsaswellasliquidityandsecuritiesmanage-ment.Moreover,itissuesmoneymarketdebtregisterclaimsandbondsforthe

Confederationandcarriesoutpaymenttransactionsonitsbehalf.

(9)TheSNBcompilesstatisticaldataonbanksandnancialmarkets,

the balance of payments, direct investment, the international investment

positionandtheSwissnancialaccounts.Indoingso,itworkswiththe

appropriate ofces of the Confederation, FINMA, authorities from other

countriesandinternational organisations.In 2011,fournewsurveyswere

introduced, namely the survey on bank lending, which was initially of a

temporarynature,thesurveyonloanquality,theadditionalsurveyonthe

mortgagemarket,andthesurveyoncustomerpaymenttransactions.

Internationalmonetarycooperation

BankingservicesfortheConfederation

Statistics

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1 Monetarypolicy

1.1 Mandateandmonetarypolicystrategy

Article 99 of the Federal Constitution entrusts the Swiss National

Bank(SNB),asanindependentcentralbank,with theconductof monetary

policyintheinterestsofthecountryasawhole.Themandateisexplainedin

detailintheNationalBankAct(art.5para.1NBA),whichrequirestheSNB

toensurepricestabilityand,insodoing,totakedueaccountofeconomic

developments.

Pricestabilityisanimportantconditionforgrowthandprosperity.

Ination(asustainedincreaseinthepricelevel)anddeation(asustained

decreaseinthepricelevel)bothhampereconomicdevelopment.Theycompli-

catedecision-makingbyconsumersandproducers,leadtomisallocationsof

labourandcapital,resultinincomeandassetredistributions,andputthe

economicallyweakatadisadvantage.

By seekingto keep prices stable, the SNB createsan environment

inwhichtheeconomycanexploititsproductionpotential.Theaimofthe

SNBsmonetarypolicyistoensurepricestabilityinthemediumandlong

term. Short-term priceuctuations, however, cannot be counteracted by

monetarypolicy.

TheSNBmaintainspricestabilitybyensuringappropriatemonetary

conditions.Thismeanskeepinginterestratesandthesupplyofmoneyand

creditalignedtotheprevailingeconomicsituation.Lowinterestratespromote

thesupplyofmoneyandcredittotheeconomy,therebyincreasingthedemand

forgoodsandservices.Overtime,thisleadstoexcessiveuseofproduction

capacity,resultinginariseinthepricelevel.Atthesametime,thereisalso

ariskthatexcessesmayoccur,particularlyonthenancialandrealestate

markets.Conversely,increasinginterestratesleadtoareductioninthesupply

ofmoneyandcredit,therebyholdingbackaggregatedemand.Theutilisation

ofproductioncapacityfallsandthepriceleveldeclines.

TheSNB money policy strategy sets outthe manner inwhich the

NationalBankintendstofullitsstatutorymandate.Itconsistsofthefol-

lowingthreeelements:adenitionofpricestability,aconditionalination

forecastoverthesubsequenttwelvequarters,andatargetrangeforarefer-

ence interestrate the three-month Swissfranc Libor (London Interbank

OfferedRate).Since6September2011,aminimumexchangeratefortheeuro

againsttheSwissfranchasalsoapplied.

Constitutionalandlegalmandate

Signicanceofpricestability

Appropriatemonetaryconditions

Monetarypolicystrategy

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TheSNBequatespricestabilitywithanannualriseinthenational

consumerpriceindexoflessthan2%.Deationinotherwords,aprotracted

declineinthepricelevelisalsoregardedasabreachoftheobjectiveofprice

stability.Withitsdenitionofpricestability,theSNBtakesintoaccount,in

particular,thefactthattheconsumerpriceindextendstoslightlyoverstate

inationandthatinationcannotbemeasuredprecisely.

TheinationforecastpublishedquarterlybytheSNBperformsadual

function.First,itservesasthemainindicatorforthemonetarypolicydeci-

sion.Second,itprovidesanimportantreferencepointforthegeneralpublicandisakeyelementincommunication.

The SNBs ination forecast is based on the assumption that the

referenceinterestratecommunicatedatthetimeofpublishingwillremain

unchangedoverthenextthreeyears.Itisthereforeaconditionalforecast

andshowshowtheSNBexpectsconsumerpricestomoveintheeventthat

monetarypolicydoesnotchange.Itcannotbecomparedwithforecastsby

commercialbanksorresearch institutions, as these institutionsgenerally

factoranticipatedinterestratemovementsintotheirforecasts.

Inationforecasts are madequarterly,and covera periodofthree

years.Thiscorrespondsroughlytothetimerequiredforthetransmissionof

monetarypolicyimpulsestooutputandprices.Withitsthree-yearforecast,theSNBtakesaccountofthefactthattheeffectsofmonetarypolicyare

laggedanditthereforehastoadoptaforward-lookingstanceinitsmonetary

policydecisions.

ForacountrylikeSwitzerlandwithitsstronginternationalintegration,

developmentsintheglobaleconomyplayanimportantrole.Consequently,

theinationforecastisbasedonassumptionswithregardtothefuturepath

oftheglobaleconomy.Indicatorsrelatedtothebusinesscycle,aswellas

exchangeratesandcommodityprices(crudeoil),arealsoofrelevancefor

short-termchangesinthepricelevel.Inaddition,changesinthemonetary

aggregatesandinlendingaretakenintoaccountintheinationforecast,

sincemediumandlong-termpricemovementsdepend,toalargeextent,onmoneysupply.

TheSNBregularlyissuesstatementsonthedevelopmentofthemost

importantindicatorsfactoredintoitsinationforecast.Itprovidesdetailsof

themodelsitusesinanumberofitspublications.

Denitionofpricestability

Conditionalination

forecast

Preparingtheconditionalinationforecast

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Iftheinationforecastshowsvaluesthatlieoutsidethepricestabil-

ityrange,anadjustmentofmonetarypolicymaybenecessary.Thus,should

inationthreatentoexceed2%onasustainedbasis,theSNBwouldconsider

tighteningits monetarypolicy. Conversely, it would schedule a monetary

easingifdeationarytendencieswereidentied.However,theSNBdoesnot

reactmechanicallytotheinationforecast.Initsmonetarypolicydecisions,

italsoconsiderspotentialrisksthatarenotfactoredintotheforecastmodels.

TheSNBimplementsitsmonetarypolicybyxingatargetrangefor

thethree-monthSwissfrancLibor.Thetargetrangeusuallyextendsoveronepercentagepoint.Asarule,theSNBholdstheLiborinthemiddleoftherange.

SinceAugust2011,anarrowtargetrangeof0.00.25%hasapplied,withthe

SNBmaintainingaLiborofclosetozero.Since6September2011,aminimum

exchangeratefortheeuroagainsttheSwissfranchasalsoapplied.

TheLiborcorrespondstoatrimmedmeanofthecurrentinterestrates

chargedby12leadingbanksforunsecuredinterbankloansandispublished

dailybytheBritishBankersAssociationinLondon.Althoughfewunsecured

loansarecurrentlybeingconcludedontheinterbankmarket,theLiborremains

animportant benchmarkfor many credittransactionsintheeconomy and

thereforeplaysakeyroleinthemonetarypolicytransmissionmechanism.

TheSNBconductsanin-depthmonetarypolicyassessmentinMarch,June, September and December. Each of these assessments results in a

monetarypolicydecisionandthepublicationoftheconditionalination

forecast.TheSNBsetsoutthereasonsforitsdecisioninapressrelease.

InJuneandDecember,it providesadditionalinformationonthemonetary

policydecisionatanewsconference.Ifnecessary,theSNBmaytakemonet-

arypolicymeasuresatanytimebetweenregularassessmentdates.Economic

developments and the background to the monetary policy decision are

presentedinthequarterlymonetarypolicyreport,whichispublishedinthe

Quarterly Bulletin.

Reviewofmonetarypolicybasedoninationforecast

Targetrangeforthethree-monthLibor

Quarterlypolicyassessments

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1.2 Challengesformonetarypolicy

The repercussions ofthe nancial crisis whichshook the global

economyin2008/2009werefeltagainin2011,asinpreviousyears.With

scalstimuli coming toan end, therecoveryof theglobaleconomy lost

strength. In addition, the European sovereign debt crisis and the scal

problemsinotheradvancedeconomiesunderminedcondenceinnancial

markets.

TheappreciationoftheSwissfranccontinuedinthersthalfof2011.

InJuly,thisappreciationacceleratedfurther.Thesubstantialovervaluation

oftheSwissfrancbecameanacutethreattoeconomicactivityinSwitzer-

landandincreasedthedownsideriskstopricestability.InAugust,theSNB

tookmeasurestocounterthestrengthoftheSwissfrancbyloweringthe

rateofinterestatanunscheduledmeeting,andsignicantlyincreasing

liquidity.However,inviewofthehighlevelofuncertaintyonthenancial

markets,theSwissfrancappreciatedfurtherandalmostreachedparity

withtheeuro.On6September,theSNBsetaminimumexchangerateof

CHF1.20pereuro.

In2011,interestratespersistedataverylowlevel.Atthesame

time,pricesontherealestatemarketcontinuedtorise,leadingtostrong

growth in lending and promoting adverse developments in the nancial

sector,withcorrespondingrisksfornancialstability.TheSNBstressedhow

importantitwasthatinstrumentsaimedatmakingaprecautionarycontri-

butionintheareaofnancialstabilitybeintroducedsoon.

Duringthecourseoftheyear,therateofinationvariedbetween

1.0%and0.7%.Inthersthalfoftheyear,theSNBstressedthatmonetary

policywouldneedtobetightenedinduecourse,owingtothefactthat,

inthelongterm,ther iskofrisingpriceswouldhaveincreasedwiththe

expansionarymonetarypolicy.WiththemassiveappreciationoftheSwiss

francandthedownturnintheinternationaleconomy,thesituationchanged

fundamentally.Theriskofinationdeclinedand,fromthemiddleoftheyear,

shortandmedium-termdeationrisksbecamethefocusofattention.

Escalationofdebtcrisis

AppreciationofSwissfrancposesthreat

Risktonancialstability

Verylowination

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1.3 Internationaleconomicdevelopments

In2011,thepaceofglobaleconomicrecoveryslowed,asdidworld

trade.Oneyearearlier,globalindustrialoutputhadrisenbyaround10%,

butin2011itgrewbyonlyhalfasmuch.Thephasingoutofscalstimuli

contributedtothisresult.Inthersthalfoftheyear,moreover,theglobal

economywasaffectedbytheearthquakeandtsunamicatastropheinJapan,

whichcausedmajordisruptionsofglobalsupplychainsandproductionlosses.

Laterintheyear,theEuropeansovereigndebtcrisisemergedasathreatto

theglobaleconomy. Theassociatedrise inuncertaintyregardinggrowth

prospectshadageneraldampeningeffectonbusinessandconsumercon-

dence,aswellasonthatofnancialmarkets.

Althoughthedebtprobleminitiallyaffectedonlyafeweuroarea

countries,inthesecondhalfoftheyearthelossofcondenceincreasingly

spilledoverintolargereuroareaeconomies.Asaresult,yieldsonSpanish,

Italian and French government bonds widened markedly over those on

Germangovernmentbonds.Inthepoliticalarena,thecrisisledtounrest

andachangeofgovernmentinanumberofcountries.Inthefaceofenor-

mouspressurefromthenancialmarkets,Europeadoptedacourseofscal

consolidation.Spain,Italy,France,Portugal,IrelandandGreeceallannounced

drasticcutsinabidtoreducebudgetdecits.Yet,despitetheextension

oftheEuropeanFinancialStabilityFacility(EFSF),andanumberofother

measuresaimedatcontainingthesovereigndebtcrisis,alastingsolution

hassofarprovedelusive.

Asthecrisisdeveloped,thestabilityofthoseEuropeanbankswith

large holdings of European sovereign bonds was increasingly called into

question.Tobolstercondenceinthebankingindustry,governmentsadopted

strictercapitalregulations.Anumberofbankswereobligedtoconsolidate

theirbalancesheets.Thisreducedtheirabilitytolend.Privatehouseholds

endeavouredtoreducetheirdebtburden,andreinedintheirspending

accordingly.Inaddition,insomecountries,includingtheUS,theUKand

Spain,fallinghousepricesmadeitmoredifculttorenancemortgagesat

morefavourableconditions.Thisconstrainedhouseholdsspendingability

evenfurther.

Slowdowninglobaleconomicrecovery

EscalationofEuropeansovereigndebtcrisis

Widespreadpressuretoreducedebtburden

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PoliticaltensionintheArabstatesledtoamarkedincreaseinoil

prices during therst four months of the year, reducing thepurchasing

powerofprivatehouseholdsinoil-importingcountries.Overtherestofthe

year,oilpricesfellslightly,butweresubjecttofairlysharpuctuations.

Theeurobegantheyearbyappreciatingsubstantiallyagainstmost

othercurrencies,onlytocomeunderincreasingpressureinthesecondhalf

oftheyearagainstthebackdropofthegrowingsovereigndebtcrisis.Atthe

endoftheyear,theeurowasworthUSD1.29.AgainsttheyenandtheSwiss

franc,whichwereregardedassafehavencurrencies,theeurodepreciatedsharplyoverthesummer.AftertheSNBimposedaminimumexchangerate

of CHF1.20 to the euro on 6 September, the euro uctuated between

CHF1.20andCHF1.24uptotheendoftheyear.

IntheUS,GDProseby1.7%in2011,comparedto3.0%in2010.

Economicgrowth,whichhadweakenedsteadilythroughoutthesecondhalf

of2010,almostcametoahaltintherstquarterof2011.Highenergy

prices, togetherwith weak income and employment growth, weighedon

demand.Inaddition,conditionsontherealestatemarketremaineddifcult,

owingtothepersistentoverhangofemptyhousing,whichmeantthat,once

again, the construction industry provided virtually no demand stimulus.

Startinginthesecondquarter,economicgrowthpickedupslightly,supportedbyapersistentlyexpansionarymonetarypolicy,aswellasacatch-upeffect

intheautomobileindustry.Consumerspendingbyprivatehouseholdsre-

covered,andunemploymentfellslightly.Towardstheendoftheyear,there

wasa strengthening inbusiness and consumer condence, boostedby a

decisioninAugustbytheUSCongresstoraisethestatutorydebtceilingand

therebyavertthecountrysloomingsovereigndefault.Atthesametime,the

governmentmadeacommitmenttosignicantlyreducethenationaldecit

overthenexttenyears.

At1.4%,euroareaGDProseatroughlythesamepaceasinthepre-

viousyear.However,economicperformancevariedfromcountrytocountry.

InheavilyindebtedmemberstateslikeGreeceandPortugal,economicactivitycontractedsharplyasaresultofwide-ranginggovernmentausteritypro-

grammes and increasedfunding costs. Inthe core countriesof theeuro

area,GDPcontinuedtoexpanduntilthethirdquarter.However,thegrowing

nervousnessonnancialmarketsandmountingconcernsovertheEuropean

bankingsectoralsoweighedonthesecountrieseconomicperformanceatthe

endoftheyear.Giventheunfavourablenancialsituation,manycountries

foundthemselvesunabletoreplaceexpiringeconomicstimulusprogrammes

withnewscalmeasures.

Markedlyhigheroilpricesatbeginningofyear

Increasingpressureoneuro

WeakstarttoyearforUSeconomy

Uneveneconomicgrowth

ineuroarea

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Thecatastrophicearthquakeandtsunamialongtheeastcoastof

JapantippedtheJapaneseeconomyintorecessioninthersthalfofthe

year.Althoughitwaspossibletorecouphalfofproductionlossesduringthe

thirdquarter,theeconomicsituationcontinuedtobechallenging,asthe

strongappreciationoftheyenagainsttheeuroandtheUSdollarhampered

exportcompetitiveness.Afurtherdownsidefactorinautumnwastheoods

inThailand,whichbroughtimportantproductionplantsfortheJapanese

electronicsandautomobileindustriestoastandstill.AverageGDPdeclined

by0.7%year-on-year.TheJapanesegovernmentreleasedsubstantialstatefundsJPY18,000billionor3.8%ofGDPforreconstructionactivitiesin

theeastofthecountry.Inaddition,asameasuretocombatthestrengthof

thecurrency,itsetupacreditfacilitytotallingUSD100billion,aimedat

facilitatingthefundingofJapanesermspurchasesofcompaniesabroad.

The emerging economies performed robustly in 2011, helping to

offset the dampening effect on the global economy stemming from the

slowdown in growth among the advanced economies. However, at 9.2%,

Chinaseconomygrewslightlymoreslowlythantheaveragerecordedover

thepasttenyears.At7.1%,theIndianeconomyalsoexpandedsomewhatless

rapidlythaninthepreviousyear.In SouthKorea,Taiwan,HongKongand

Singapore,businessactivityintheelectronicsindustry,amajorindustryintheregion,slowedasaresultofweakerdemandfromthelargeadvanced

economies.InLatinAmerica,growthwasgenerallyrobust,althoughhere,

too,thepaceofeconomicgrowthslowedtowardstheendoftheyear.

Initially, consumer price ination continued to increase in 2011,

drivenmainlybyrisingenergyandrawmaterialsprices.Moreover,core

inationameasureofinationthatexcludesfoodandenergypricesalso

roseslightly;insomeeuroareacountries,thiswaspartlyduetoincreasesin

indirecttaxesandadministeredprices.Inanumberofemergingeconomies,

robusteconomicgrowthandtheassociatedriseinproductioncapacity

utilisationrateswerethemainfactorsbehindtheincreaseincoreination.

Towardstheendoftheyear,therewasageneraleasingofinationarypressureasaresultoftheslowingeconomy.

DifcultyearforJapan

Robustperformanceinemergingeconomies

Higherinationratesworldwide

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2007 2008 2009 2010 2011

2007 2008 2009 2010 2011

United States

Japan

Euro area

United Kingdom

Switzerland

In real terms,index: 100 = period average(Q1/2007-Q4/2011)Sources: SECO, ThomsonFinancial Datastream

Level of gross domestic product

92

94

96

98

100

102

104

106

United States

Japan

Euro area

United Kingdom

Switzerland

Year-on-year change

in percent, in real termsSources: SECO, ThomsonFinancial Datastream

Growth of gross domestic product

12

10

8

6

4

2

0

2

4

6

United States

Japan

Euro area

United Kingdom

Switzerland

Consumer prices, year-on-year changein percentSources: SFSO, ThomsonFinancial Datastream

Inflation

3

2

1

0

1

2

3

4

5

6

Accountabilityreport21SNB

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Against the background of re-emerging tensions on the nancial

markets,attheendofNovember,theBankofCanada,theBankofEngland,

theBankofJapan,theEuropeanCentralBank(ECB),theUSFederalReserve

andtheSwissNationalBankannouncedjointmeasurestoexpandtheir

capacityforprovidingliquiditytotheglobalnancialsystem.Themeasures

wereaimedatmitigatingtheimpactofnancialmarkettensiononthesupply

ofcredittohouseholdsandcompanies,andtherebysupportingeconomic

growth.Forthispurpose,temporarybilateralliquidityswaparrangements

wereagreedbythecentralbanksconcerned,inorderthatsufcientliquiditycouldbeprovidedinallcurrencyzones,shouldmarketconditionsrender

itnecessary.Theyalsoagreedtolowerthepricingonexistingtemporary

liquidityswapagreementsinUSdollarsby0.5percentagepoints,to0.5%.

The central banks of most advanced economies maintained their

expansionarymonetarypolicycourse.Inanenvironmentofhighunemploy-

mentandsubduedgrowthprospects,theFederalReserveheldthetarget

rangeforitsreferenceinterestrateunchangedat0.00.25%.Moreover,in

August,itannouncedthatitdidnotintendtoraisethereferenceratebefore

mid-2013,andreiteratedthisstanceoverthenextfewmonths.InJune,as

expected,theFederalReservewoundupitssecondlargesecuritiespurchase

programme,whichamountedtoUSD600billionandwasaimedatbringingaboutaquantitativeeasingofmonetarypolicy.However,inordertobring

long-terminterestratesdownfurther,fromSeptemberonwards,theFederal

Reserveextendedtheaveragematurityofitssecuritiesportfolio.Inaddition,

tosupportthemortgagemarketitbegantorollovermaturingmortgage-

backedsecuritiesintosimilarinstruments,insteadofintogovernmentbonds

ashitherto.

Inthelightofgrowinginationarypressure,theECBraiseditsmain

renancingrateinAprilandJuly,from1.0%to1.5%.Subsequently,the

spreadofthesovereigndebtcrisisledtoachangeofcourse.Whentension

ongovernmentbondmarketsincreasedinAugust,theECBuseditsnancial

marketstabilisationprogramme,launchedinMay2010,topurchaseasub-stantialamountofgovernmentbondsissuedbynanciallyexposedeuroarea

memberstates.Tosupportbanklending,italsolaunchedasecondcovered

bondpurchaseprogramme;therstsuchprogrammehadbeencompletedin

mid-2010.InNovemberandDecember2011,itreduceditsmainrenancing

rate,tonishat1.0%.AlsoinDecember,itdecidedtocarryoutthree-year

renancingoperations,tolowertheminimumreserveratioforbanks,and

toexpandthelistof eligiblecollateralfor transactions withEurosystem

centralbanks.

Coordinatedliquiditymeasuresbycentralbanks

ExpansionarymonetarypolicyintheUS

inEurope

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TheBankofJapanmaintaineditszerointerestratepolicy.Inadd-

ition,itexpandedthesecuritiespurchaseprogrammeintroducedinOctober

2010byJPY20,000billiontoJPY55,000billion,andengagedinforeign

exchangemarketinterventionsforatotalamountofoverJPY14,000billion

inordertocountertheyensappreciation.

Tocounterthethreatofination,centralbanksinanumberofemer-

ging economies initially tightened their monetary policy. Chinas central

bankonceagainraiseditsreserverequirementratioforbanksaswellasits

referenceinterestrates.Inaddition,itallowedtherenminbitoappreciatefurther.Bytheendoftheyear,theChinesecurrencyhadgainedsome5%

againsttheUSdollar,althoughonatrade-weightedbasistheappreciation

isslightlysmaller.TheReserveBankofIndiatightenedinterestratesina

seriesofstepsuptoOctober.

Towardstheendoftheyear,thefocusshiftedtoriskstothereal

economy.InOctober,Singaporesmonetaryauthoritybegantoloosenmon-

etarypolicy.AttheendofNovember,thePeoplesBankofChinalowered

itsreserverequirementratioforbanks.Achangeofpolicyalsotookplace

inBrazilduringthesecondhalfoftheyear.

andinJapan

Emergingeconomiesrsttighten

thenloosenmonetarypolicy

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1.4 EconomicdevelopmentsinSwitzerland

The increasing deterioration in the international environment in

2011 weighed heavily onthe Swiss economy. Overall,GDProse by 1.9%,

followinganincreaseof2.7%in2010.

Thisfairlyimpressivegrowthwasmainlyduetothefavourablegrowth

momentuminthersthalfoftheyear.Inthesummer,thestrongappreci-

ationoftheSwissfrancseverelyimpairedtheabilityofSwisscompaniesto

compete onpricing. At thesame time, theappreciableslowdown in the

globalindustrialcyclemadeitincreasinglydifcultforexporterstooffset

exchangerate-relatedmarginlossesthroughhighersales.Theuncertainty

overtheeconomicoutlookincreased,particularlyamongexport-oriented

companies.The introduction of the minimum exchange rate againstthe

euroon6Septembereasedthesituationandgavemanycompaniesgreater

planningsecurity.

Astheeconomyslowed,capacityutilisationalsobegantodecline.

Inthenalmonthsoftheyear,unemploymentroseagainslightly,forthe

rsttimeinalmosttwoyears.

Realgrossdomesticproduct

Year-on-yearchangeinpercent

2007 2008 2009 2010 2011

Privateconsumption 2.3 1.4 1.4 1.7 1.0

Governmentconsumption 0.3 2.7 3.3 0.8 1.7

Investment 5.1 0.5 4.9 7.5 3.9

Construction 2.3 0.0 3.0 3.5 2.5

Equipment 11.1 0.8 10.8 10.9 5.1

Domesticdemand 1.4 0.5 0.6 1.5 0.9

Exportsofgoodsandservices 9.6 3.1 8.6 8.1 3.7

Aggregatedemand 4.4 1.5 3.0 4.0 1.9

Importsofgoodsandservices 6.1 0.3 5.5 8.0 2.5

Grossdomesticproduct 3.6 2.1 1.9 2.7 1.9

Sources:SECO,SFSO,SNB

Lowergrowth

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The pace of goods and services exports slackened considerably in

2011asaresultofthestrongSwissfrancandtheglobaleconomicslowdown.

Inthethirdquarter,theydeclinedforthersttimesincetheendofthe

2008/2009 recession. Although they recovered substantially in the fourth

quarter,theiraverageannualgrowthwasmodestatbest.Asregardsgoods

exports,theimpactofthedownturninmanufacturingwasprimarilyreected

inlowerexportsofmachineryandmetalproducts.Bycontrast,forexportsof

pharmaceuticalsandwatches,theupwardtrendcontinued.Intheservices

sector,cross-borderbankingbusinessandtourismdeclinedsignicantly.Importsroseonlymarginally,despitethestrongSwissfranc.Thesoft-

eningoutlookandthegrowinguncertaintyweighedonthedemandforcapital

goodsandintermediategoods.Bycontrast,theincreasedforeignpurchasing

powerofdomestichouseholdsledtoariseinimportsofconsumergoodsin

particularautomobilesaswellasinexpenditureontourismservicesabroad.

Equipmentinvestmentlostconsiderablemomentumoverthecourseof

theyear;havingincreasedslightlyintherstquarter,itthendeclinedover

thenexttwoquarters.Thismainlyreectedthedifcultconditionsfacingthe

exportindustry,whosesalesoutlookandprotabilitydeterioratedasaresult

ofthestrongSwissfrancandtheslowdownintheglobaleconomy.Therewere

signsofarecoveryinthefourthquarter.Constructioninvestmentcontinuedtosupporttheeconomy.Favour-

ablenancingconditionsandcontinuingimmigrationhadapositiveeffecton

residentialconstructioninvestment.Civilengineeringwasrobust,beneting

mainlyfrompublicsectorinfrastructureprojects.However,commercialcon-

structiondeclined.

At1.0%,thegrowthinprivateconsumptionin2011wasconsiderably

weakerthaninthepreviousyear.Thiswaspartlyattributabletothegrowing

uncertaintyamonghouseholdsaboutfutureeconomicdevelopments,which

contrasted with the positive growth in household income. However, the

declineinconsumptiongrowthmaybeslightlyoverstated,asthestrength

oftheSwissfrancledconsumers tomake morepurchases abroad,andthecoverageofsuchpurchasesintheconsumerspendingstatisticsisincomplete.

Cross-bordershoppingprimarilyaffectedconsumptionoffood,clothingand

shoes domestic salesin these areasactuallyfell. By contrast, consumer

expenditureonhousingandhealthcarebenetedfromthecontinuingstrong

populationgrowth,andexperiencedafurthersubstantialincreasein2011.

Publicsectorspendingroseby1.7%,andalsocontributedtoeco-

nomicgrowth.

Slowdowninforeigntrade

Decliningequipmentinvestment

Supportfromconstructioninvestment

Weakergrowthinconsumption

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Forsomeindustries,theimpactoftheeconomicslowdownwascon-

siderable.ManufacturingandtourismwerehitbythestrongSwissfrancand

waningforeigndemand.Inaddition,banksfelttheimpactoftheexceptionally

highlevelofuncertaintyonthenancialmarkets,aswellasthestructural

changesemergingintheglobalbankingindustry.Inareaswithadomestic

focus,suchasconstruction,andinmostindustriesintheservicessector,

valueaddedincreasedfurther.

Afteranonlyslightlynegativeoutputgapwasrecordedatthebeginning

oftheyear,GDPgrowthfellbelowpotentialinthesecondhalfoftheyear.Asaresult,productioncapacityutilisationdecreased,andtheoutputgap

widenedagain.

In 2011, employment rose in both manufacturing and theservices

sector,insomecasesquitestrongly.Atthesametime,theseasonallyadjusted

rateofunemploymentdeclinedfrom3.4%inJanuaryto3.0%inSeptember;

although the decline was overstated to a certain extent due to one-off

statistical effects associatedwith changes inthelaw onunemployment

insurance.UpuntilDecember,therateofunemploymentincreasedto3.1%.

Thenumberofemployeesonshort-timeworkingalsoroseslightly,having

fallenalmosttozerointhethirdquarter.

Labourmarket

2007 2008 2009 2010 2011

Employmentintermsoffull-timeequivalents 1 3.2 2.7 0.3 0.6 1.1

Unemploymentrateinpercent 2.8 2.6 3.7 3.9 3.1

Numberofjobseekersinpercent 4.2 3.9 5.2 5.5 4.6

Swissnominalwageindex 1,2 1.6 2.0 2.1 0.8 1.2

Compensationofemployees,nominal1 5.3 5.1 2.5 0.7 3.7

1Year-on-yearchangeinpercent.

22011:SNBforecast.

Sources:SECO,SFSO

Impactvariedfromoneindustrytoanother

Outputgapopensagain

Robustlabourmarket

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2007 2008 2009 2010 2011

2007 2008 2009 2010 2011

GDP

Private consumption

Investment in construction

Investment in equipment

Exports

Year-on-year changein percent, in real terms

Source: SECO

Gross domestic product and components

20

15

10

5

0

5

10

15

20

Imports of goods andservices

Exports of goods andservices

In CHF billions,in real terms,seasonally adjusted

Source: SECO

Foreign trade

40

45

50

55

60

65

70

75

Unemployed persons

Job seekers

In thousands,seasonally adjustedand smoothed

Source: SECO

Labour market

75

100

125

150

175

200

225

250


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Afterweakgrowthin2010,wagesrosesomewhatmorestronglyin

2011.AccordingtoSNBestimates,nominalwagesasmeasuredbytheSwiss

wageindexwereup by1.2%, following0.8% in 2010. The total wage bill

(compensationofemployees)as measuredbythenationalaccountsroseby

3.7%. After deduction of1.1% employment growth calculated in terms of

full-timeequivalents,thisresultedinariseinnominalwagesof2.6%,follow-

ingaslightincreaseof0.1%thepreviousyear.

Sinceconsumerpriceinationin2011amountedtoonly0.2%,real

wages therefore rosemarkedly. They increased by 1.0% according to theSwisswageindex,andby2.4%accordingtothenationalaccounts;in2010

theyhadfallenslightly.

The Swiss franc appreciation and the economic slowdownledto a

pronounceddeclineinproducerandimportprices(pricesoftotalsupply)in

thesecondhalfoftheyear.Thepricesofbothgoodsearmarkedforexportand

thoseproducedforthedomesticmarketcameunderpressure.Brokendown

accordingtocategoryofgoods,pricesforbothconsumergoodsandcapital

goodstrendeddownwards.Onlyenergypricesroseappreciablythroughout

theyear.

In2011,theconsumerpriceindex(CPI)roseby0.2%onaverage,after

anincreaseof0.7%theyearbefore.TheappreciationoftheSwissfrancinthersthalfoftheyearactedwithacertainlagonconsumerprices.InOctober,

annualination turnednegative; inDecember, it was 0.7%.At year-end,

pricesforimportedgoodsandservices(excludingoilproducts)were5.7%

lowerthanoneyear earlier the steepest decline sinceexible exchange

rateswereadoptedin1973.Butthepricesofdomesticallyproducedgoods

alsocameunderpressure,asconsumersincreasinglysoughtcheaperproducts

just across the border.Annual ination indomestic services, by contrast,

remainedaround1.0%throughouttheyear.

Strongriseinrealwages

Decliningproducerandimportprices

Declineinconsumerpricesatyear-end

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2007 2008 2009 2010 2011

2007 2008 2009 2010 2011

Producer and import prices

Producer prices

Import prices

Year-on-year changein percentSource: SFSO

Producer and import prices

12

10

8

6

4

2

0

2

4

6

Consumer prices

Domestic goods and services

Imported goods and services

Year-on-year changein percentSource: SFSO

Consumer prices

8

6

4

2

0

2

4

6

8

Consumer prices

Trimmed mean

Dynamic factor inflation

Year-on-year changein percentSources: SFSO, SNB

Core inflation

1.5

1

0.5

0

0.5

1

1.5

2

2.5

3

3.5


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Nationalconsumerpriceindexandcomponents

Year-on-yearchangeinpercent

2010 2011 2011

Q1 Q2 Q3 Q4

Consumerpriceindex,overall 0.7 0.2 0.6 0.4 0.4 0.5

Domesticgoodsandservices 0.6 0.6 0.6 0.6 0.7 0.3Goods 0.1 1.3 1.0 1.0 1.1 2.1

Services 0.8 1.1 1.1 1.1 1.2 1.1

Privateservices(excludingrents) 0.6 0.8 0.6 0.8 0.9 0.9

Rents 1.1 1.3 1.5 1.3 1.3 1.2

Publicservices 0.9 1.8 2.0 1.8 1.8 1.4

Importedgoodsandservices 0.9 0.7 0.5 0.3 0.4 2.6

Excludingoilproducts 1.3 2.5 1.3 1.9 1.8 5.0

Oilproducts 13.9 9.3 10.5 8.9 7.5 10.5

Coreination

Trimmedmean 0.6 0.5 0.8 0.6 0.6 0.1

Dynamicfactorination 0.7 1.0 1.2 1.2 0.9 0.7

Sources:SFSO,SNB

Numerousshort-termuctuationscanhaveanimpactoninationas

measuredbytheCPI.Forthisreason,theSNBcalculatestwocoreination

rates,thetrimmedmeananddynamicfactorination(DFI),inordertoana-

lysetheinationtrend.Withthetrimmedmeansmethod,thosegoodsprices

recordingthegreatestmonth-on-monthchangeareexcludedfromtheCPI

basketeachmonth(15%ateitherendofthedistribution).DFIisameasureof

theinationtrendthattakesaccountofalargenumberofvariablescoveringthegoodsmarkets,thenancialmarketsandthelabourmarket.

Inationasmeasuredbycoreinationratesdecreasedsubstantially.

This conrms a broad-based decline in inationary pressure. DFIfellfrom

1.1%to0.6%betweenJanuaryandDecember.Thetrimmedmeanevendeclined

from0.7%to0.0%overthesameperiod.

Lowcoreination

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2007 2008 2009 2010 2011

2007 2008 2009 2010 2011

Three-month Libor

Yield on ten-yearSwiss Confederation bonds

In percent

Money and capital market rates

0

0.5

1

1.5

2

2.5

3

3.5

CHF/USD

CHF/EUR

Nominal

Exchange rates

0.8

0.9

1

1.1

1.2

1.3

1.4

1.5

1.6

1.7

Real

Nominal

40 trading partnersIndex: January 1999 = 100

Export-weighted Swiss franc exchange rates

90

100

110

120

130

140

150

160


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Drivenbypositivegrowthprospects,theyieldonten-yearConfeder-

ationbondsrosefrom1.7%atthebeginningofJanuarytoanannualhighof

2.1%inApril.ThefurtherescalationoftheEuropeansovereigndebtcrisisand

theworseningoutlookforglobaleconomicgrowthresultedinaighttosafe

investments, including those in Swiss francs. Subsequently, the yield on

ten-yearConfederationbondsfellconsiderably,reachinga historicallowof

0.7%inDecember.Averagedoutovertheyear,itcameto1.5%.Forthreeand

six-monthmoneymarketdebtregisterclaimsoftheConfederation,yieldshad

evenbeennegativesinceAugust.Thelowinterestratesledtoasubstantialincreaseinmoneyheldby

thedomesticprivatenon-banksectorin2011.TheannualaveragefortheM1,

M2andM3 monetaryaggregateswas 8.7%,7.9%and7.0%higher,respect-

ively,thaninthepreviousyear.Themonetarybase,whichiscomposedof

banknotesincirculationplussightdepositsofdomesticbankswiththeSNB,

declinedbyaround30%year-on-yearinthersthalfof2011.Inthesecond

half,itexpandedsharplyinthewakeoftheSNBsmeasurestocombatthe

strengthoftheSwissfranc.Averagedoutovertheyear,itwas52.7%higher

thanoneyearpreviously.

In2010,theSwissfranchadalreadygainedaround9%againstthe

euroandabout4%againsttheUSdollaronaveragefortheyearasawhole,anditcontinuedtostrengthenoverthersthalfof2011.Aftertheappreci-

ationgatheredpaceinJuly,on9AugusttheSwissfrancpeakedatCHF1.01

totheeuroandCHF0.71tothedollar.ComparedtotheaverageforDecember

2010, this represented an appreciation of 19% against the euro and 25%

againstthedollar.On6September,theSNBsetaminimumexchangerateof

CHF1.20pereuro.Subsequently,theeurostayedabovetheminimumrate.In

December2011,theaveragerateforoneeurowasCHF1.23,whileforthe

dollaritwasCHF0.93.

Therealexport-weightedexternalvalueoftheSwissfrancfor2011

averaged10%higherthanforthepreviousyear.Despitetheimpositionofthe

minimumexchangerateagainsttheeuro,inDecembertheexternalvalueoftheSwissfrancwasstill17%higherthantheaverageforthelast20years.

ExtremelylowConfederationbondyields

Stronggrowthinmoneysupply

HighexternalvalueofSwissfranc

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2007 2008 2009 2010 2011

2007 2008 2009 2010 2011

Monetary base

M1

M2

M3

In CHF billions

Level of monetary aggregates

0

100

200

300

400

500

600

700

800

Monetary base

M1

M2

M3

Year-on-year changein percent

Growth of monetary aggregates

50

0

50

100

150

200

250


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1.5 Monetarypolicyin2011

TheSNBsmonetarypolicydecisionsaresummarisedbelowintheform

inwhichtheywerepresentedfollowingitsquarterlymonetarypolicyassess-

ments.Informationisalso providedonthemeasurestaken bythe SNBin

AugustandSeptembertocombatthestrengthoftheSwissfranc.

AtthemonetarypolicyassessmentinMarch,theSNBdecidedtomain-

tainitsexpansionarymonetarypolicyinviewofthehighlevelofuncertainty

andthetensioninforeignexchangemarkets.Itleftthetargetrangeforthe

three-month Libor unchanged at 0.00.75% andcontinued to aimfor an

interestratearound0.25%.

Intherstquarter,theglobalrecoverywassomewhatstrongerthan

theSNBhadexpectedinDecember2010.However,theuncertaintyoverfuture

economicdevelopmentsremainedhighduetotheunrestinNorthAfricaand

theMiddleEast.Moreover,atthetime,theglobaleconomicconsequencesof

theearthquakeandtsunamicatastropheinJapanweredifculttoassess.

Despite the signicant appreciation of the Swiss franc, the Swiss

economygrewfasterthananticipatedatthebeginningoftheyear.Technical

capacityutilisationhadrisenfurther.Atthesametime,unemploymentand

short-timeworkinghadfallen.Businessexpectationsalsosuggestedthatthe

favourableeconomictrendwouldcontinue.However,delayedeffec tsfromthe

appreciationoftheSwissfrancweretobeexpected.Consequently,inMarch,

theSNBprojectedthatGDPgrowthin2011wouldslowtoabout2.0%.

Atthistime,monetaryconditionsreectedtheSNBsexpansionary

monetarypolicy.Thethree-monthLiborhadnotmovedoutofthelowerpart

ofthe target rangesince December 2010, remaining almost unchanged at

0.17%.Long-terminterestrateshadrisensincetheirtroughinAugust2010,

butwerestillatalowlevel.

Therealexport-weightedexternalvalueoftheSwissfrancpersisted

ata historicallyhigh level.Atthe sametime,theexchangerate was very

volatile.Sincemortgagelendingwasstillincreasingatafastpace,theSNB

expresseditscontinuedconcernaboutthesituationonthemortgageandreal

estatemarkets.

Monetarypolicydecisions

Monetarypolicyassessment

of17March

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Theconditionalinationforecastpublishedon17Marchwasbasedon

athree-monthLiborof0.25%.Duetoarenewedsharpincreaseinoilprices,

strongerdomesticgrowthandpositiveassumptionsfortheglobaleconomy,

theforecastfor2011showedaslightriseinination,withapeakinthethird

quarterattributabletoabaseeffect.Sincetheassessmentoftheination

outlookhadnotchangedsignicantlycomparedtoDecember2010,thepath

ofthenewforecastmatchedthatoftheoldforecastfrommid-2012.Towards

theendoftheforecasthorizon,inationrosebrisklyandmovedoutsidethe

rangewhichtheSNBequateswithpricestability.AtthemonetarypolicyassessmentinMarch,theSNBdrewattentiontothefactthattheexpansionary

monetarypolicy could not bemaintained over the entireforecast horizon

withoutcompromisingpricestabilityinthelongerterm.

Atitsquarterlyassessmentof16June,theSNBmaintaineditsexpan-

sionarymonetarypolicy.Thetargetrangeforthethree-monthLiborremained

unchangedat0.00.75%,andtheSNBannouncedthatitintendedtokeepthe

Liborwithinthelowerpartofthetargetrangeataround0.25%.

Even ifthe outlook had dampened somewhatin spring, the global

economicrecoverywascontinuing.Thelevelofcapacityutilisationinthe

Swisseconomywasrising.DespitethestrongappreciationoftheSwissfranc,

the economy continued to benet from robust international demand. For2011,theSNBmaintaineditsGDPgrowthforecastofaround2.0%.

At itsmonetary policy assessment in June, the SNB stressed the

risksincluding,inparticular,theunresolveddebtproblemsinanumberof

euroareacountries;afurtherriskarosefromthescalconsolidationmeas-

uresthatseveralcountrieswereforcedtoundertakedespitetheireconomic

fragility. The increase in commoditypriceswas alsoweighingonglobal

economicgrowthandposedariskforglobalination.InSwitzerland,the

mainriskswerestill,ontheonehand,theeffectsofthestrongSwissfranc

ontheexportindustryand,ontheother,thedangerofoverheatinginthe

realestatesector.

The path of the SNBs conditional ination forecast of June wasslightlyabovethatofMarchuntilthebeginningof2012.Thiswasduetothe

assumptionofhigheroilpricesandsomewhathigherimportprices.Thepath

ofthenewforecastfellbelowthatofMarchoverthecourseof2012because

oftheearlier appreciation oftheSwissfranc and theslightweakeningin

internationalgrowth.Towardstheendoftheforecastperiod,inationrose

briskly,movingoutsidethepricestabilityrange.TheSNBwarnedthat,given

these assumptions, the expansionary monetary policy could not be main-

tainedovertheentireforecasthorizonwithoutcompromisingpricestability

inthelongerterm.However,itdrewattentiontothefactthatahighlevelof

uncertaintywasassociatedwiththeconditionalinationforecast,duetothe

risksalreadymentioned.

Monetarypolicyassessmentof16June

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AfterthemonetarypolicyassessmentinJune,theappreciationofthe

Swissfrancacceleratedinanenvironmentofincreasedriskaversiononinter-

national nancial markets, driven by discussions about scal measures in

GreeceandItaly.InJulyalone,theSwisscurrencyappreciatedby7.2%against

theeuroand5.5%againsttheUSdollar.Accordingly,therealexport-weighted

Swissfrancexchangeratewas22%aboveitslong-termaverageinJuly.

On3August,theSNBbegantakingmeasurestocounterwhathadnow

becomeastrongovervaluationoftheSwissfranc.Itstatedthatthestrength

oftheSwissfrancwasthreateningthedevelopmentoftheeconomyandincreasingthedownsideriskstopricestabilityinSwitzerland.Tocombatthe

strengthoftheSwissfranc,theSNBinitiallyattemptedtoachieveafurther

easingofmonetarypolicywithitscustomaryinstruments.Forthisreason,it

narrowedthetargetrangefortheLiborfrom0.00.75%to0.00.25%with

immediateeffect,aimingforathree-monthLiborasclosetozeroaspossible.

Atthesametime,itannouncedthatitwouldsignicantlyincreasethesupply

ofliquiditytotheSwissfrancmoneymarketbyexpandingbankssightdeposits

attheSNBfromCHF30billiontoCHF80billionwithinafewdays.Despite

this,theSwissfranccontinuedtoappreciateand,on9August,almostreached

paritywiththeeuro.

On10August,theSNBexpandeditsmeasuresagainstthestrongSwissfranc. The risein risk aversion on the international nancial markets had

furtherintensiedtheovervaluationoftheSwissfrancinthepreviousdays.

TheSNBincreasedthetargetforbankssightdepositsattheSNBfromCHF80

billiontoCHF120billion.

On17August,theSNBagainintensieditsmeasuresagainstthestrong

Swissfranc.Althoughthemeasuresalreadytakenwerehavinganimpact,the

Swissfrancremainedmassivelyovervalued.Consequently,theSNBdecidedto

againincreasebankssightdepositsattheSNBsignicantly,fromCHF120

billiontoCHF200billion.Insodoing,itincreasedthedownwardpressure

onmoneymarketinterestratesinordertofurtherweakentheSwissfranc

exchangerate.

MeasurestakeninAugusttocounterstrengthofSwissfranc

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Q4 2010 Q1 2011 Q2 Q3 Q4

Q4 2010 Q1 2011 Q2 Q3 Q4

16.

12.

2010

17.

3.

2011

16.

6.

2011

3.

8.

2011

15.

9.

2011

15.

12.

2011

6

.9.

2011

3/10/17.

8.

2011

Three-month Libor

Target range

Daily values in percent

Three-month Libor

0

0.2

0.4

0.6

0.8

1

Sight deposits of domestic banks

Other sight deposits

Total sight deposits

Weekly averages, in CHF billions

Sight deposits at the SNB

0

40

80

120

160

200

240

280

CHF/EUR rate

Minimum exhange rateof CHF 1.20 per euro

Daily rates

CHF/EUR rate

1

1.1

1.2

1.3

1.4

1.5


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TheSNBsliquiditymeasuresachievedacertainamountofsuccess.

However,because ofcontinuinguncertainty onthe nancial markets and

furthernegativereportsabouttheeuroarea,upwardpressureontheSwiss

francpersistedandintensiedagainatthebeginningofSeptember.TheSNB

thereforedecidedinfavourofdirectinterventionontheforeignexchange

market.On6September,itannouncedthatitwouldnolongertolerateaEUR/CHF

exchangeratebelowaminimumrateofCHF1.20.Withthismeasure,theSNB

wastakingastandagainsttheacutethreattotheSwisseconomyandtherisk

ofdeationarydevelopmentsoriginatingfromthemassiveovervaluationoftheSwissfranc.TheSNBemphasisedthatitwouldenforcethisminimumrate

withtheutmostdeterminationandwaspreparedtopurchaseforeigncurrency

inunlimitedquantitiesforthispurpose.Itconsideredthat,evenatarateof

CHF1.20pereuro,theSwissfrancwasstillhighand,consequently,expected

ittoweakenovertime.Iftheeconomicoutlookanddeationriskssorequired,

theSNBwouldtakefurthermeasures.

Despite the introductionof theminimumexchangerate,theSNBs

monetarypolicyframework,withitsfocusonpricestability,remainedvalid.

Theminimumexchangerateprovidedthemonetarypolicyframeworkwithan

additionaloperationaltarget,asthetargetrangeforthethree-monthLibor

couldnotbeloweredanyfurther.Atitsquarterlyassessmentof15September,theSNBreafrmedits

commitmenttotheminimumexchangerateofCHF1.20pereuroseton6Sep-

tember.Itcontinuedtoaimforathree-monthLiboratzeroandannounced

thatitwouldmaintaintotalsightdepositsattheSNBatsignicantlyabove

CHF200billion.TheSNBconsideredthat,evenatarateofCHF1.20,theSwiss

francwasstillhighandexpectedthatitwouldweakenfurther.

Introductionofminimumexchangerateagainsteuroon6September

Monetarypolicyassessmentof15September

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The growthofthe global economyhadslowed substantially in the

courseof the second quarter.The outlook for the advancedeconomies,in

particular, had worsened considerably. Consequently, economic activity in

SwitzerlandwassufferingsimultaneouslyfromthestrongSwissfrancandthe

softeningininternationaldemand.TheSNBexpectedthatgrowthwouldcome

toahaltinthesecondhalfoftheyear.For2011asawhole,economicgrowth

of1.52.0%couldbeexpected,butonlybecauseofthefavourableeconomic

developmentinthersthalfoftheyear.Withoutthestabilisingeffec tofthe

minimumexchangerate,therewouldhavebeenasubstantialriskofdeationandrecession.

Uncertaintyaboutthefutureoutlookfortheglobaleconomyremained

exceptionallyhighandtherisksfortheglobalnancialsystemhadincreased

considerably.Thedeteriorationintheoutlookforgrowthandscalproblems

intheadvancedeconomieswerehavinganegativeimpactoncondencein

nancialmarketsworldwide.

The SNBs conditional ination forecast had shifted substantially

downwardsasaresultoftheappreciationoftheSwissfrancandthedeterior-

ationintheoutlookfortheglobaleconomy.Althoughtheforecastwasbased

onathree-monthLiborof0.0%andafurtherweakeningintheSwissfranc,

aperiodofnegativeinationwasprojected.Thereafter,inationwouldriseslowlytowardstheendoftheforecastperiod,to1.0%.Thus,therewasnorisk

ofinationinSwitzerlandintheforeseeablefuture.Therewere,however,

downsiderisksforpricestability.

Atitsquarterlyassessmentof15December,theSNBreafrmedits

commitmenttotheminimumexchangerateofCHF1.20pereuro.Itstressed

thatitwaspreparedtobuyforeigncurrencyinunlimitedquantitiesandto

continueenforcingtheminimumexchangeratewiththeutmostdetermin-

ation. It held the target range for the three-month Libor at 0.00.25%,

continuingtoaimforaLiborclosetozero.TheSNBstillconsideredtheSwiss

franctobehigh,andexpectedafurtherweakening.Itstoodreadytotake

furthermeasuresatanytimeiftheeconomicoutlookandtheriskofdeationsorequired.Inaddition,itwouldcontinuetomaintainliquidityatexception-

allyhighlevels,butwouldnotsetaspecictargetlevelforsightdeposits.

Monetarypolicyassessmentof15December

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Althoughthe global economyhad picked upslightly overall in the

thirdquarter,growthinEuroperemainedweak.InSwitzerland,thehighlevel

oftheSwissfrancsincethesummerwasweighingheavilyontheeconomy.For

2011,theSNBcontinuedtoexpectGDPgrowthof1.52.0%.Thiswasbecause

ofthefavourableeconomicdevelopmentinthersthalfoftheyear.For2012,

itwasexpectingeconomicgrowthintheorderof0.5%.

The international environment continued to be highly uncertain.

GivenSwitzerlands closeinterconnection withtheeuro area,thecountry

wouldbeseriouslyaffectedbyafurtherescalationintheEuropeansover-eigndebtcrisisandtheconsequencesthiswouldhaveontheinternational

nancialsystem.

In December, the SNBs conditional ination forecastwas adjusted

downwards once again. In the short term, ination dipped into negative

territoryfasterthanintheSeptemberforecast,owingtotheeffectsofthe

earliercurrencyappreciation,whichhadbeenstrongerthanexpected.Inthe

longerterm,theworseningofthegrowthoutlookfortheeuroareawasdamp-

eningination.Althoughtheforecastwasbasedonathree-monthLiborof

0.0%andaweakeningintheSwissfranc,expectedinationattheendofthe

forecastperiodonlyincreasedto0.8%.Consequently,theinationforecast

showednoriskofinationinSwitzerlandintheforeseeablefuturedespitethestronggrowthinthemonetaryandcreditaggregates.Thisforecastpath

matched results obtained in the surveys on ination expectations, which

showedmildly negativeinationfor 2012anda slight riseinthe levelof

pricesin2013,whichwasconsistentwiththeSNBsdenitionofpricestabil-

ity.TheSNBwarnedthatifforeigndemandweretofalloffmoresharplythan

expected,downsideriskstopricestabilitywouldemerge.

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2010 2011 2012 2013 2014

2010 2011 2012 2013 2014

Inflation

December 2010 forecast:three-month Libor 0.25%

March 2011 forecast:three-month Libor 0.25%

Year-on-year changein national consumer

price index in percent

Inflation forecast of 17 March 2011

1

0.5

0

0.5

1

1.5

2

2.5

3

Inflation

March 2011 forecast:three-month Libor 0.25%

June 2011 forecast:three-month Libor 0.25%

Year-on-year changein national consumerprice index in percent

Inflation forecast of 16 June 2011

1

0.5

0

0.5

1

1.5

2

2.5

3

Inflation

June 2011 forecast:three-month Libor 0.25%

September 2011 forecast:three-month Libor 0.0%


Inflation forecast of 15 September 2011

1

0.5

0

0.5

1

1.5

2

2.5

3

Inflation

September 2011 forecast:three-month Libor 0.0%

December 2011 forecast:three-month Libor 0.0%


Inflation forecast of 15 December 2011

1

0.5

0

0.5

1

1.5

2

2.5

3


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2 Implementationofmonetarypolicy

2.1 Backgroundandoverview

ItisthetaskoftheSwissNationalBank(SNB)toprovidetheSwiss

francmoneymarketwithliquidity(art.5para.2(a)NationalBankAct(NBA)).

TheSNBimplementsitsmonetarypolicybymanagingliquidityonthemoney

marketandtherebyinuencingtheinterestratelevel.Thethree-monthSwiss

francLiborservesasitsreferenceinterestrate.Since6September2011,an

additional operational target in the form of a minimum exchange rate of

CHF1.20pereurohasalsoapplied.

TheframeworkwithinwhichtheSNBmayconducttransactionsinthe

nancialmarketisdenedinart.9NBA.Aslenderoflastresort,theNational

Bankalsoprovidesemergencyliquidityassistance(art.9para.1(e)NBA).

TheSNBmanagesthethree-monthLiborbymeansofliquidity-providing

andliquidity-absorbingsecuredmoneymarketoperations.Throughthevolume

andconditionsoftheseoperations,theSNBcaninuencethethree-month

Libor.Thechoiceofliquiditymanagementregimedependsonmonetarypolicy

requirementsandtheliquiditystructureinthebankingsystem.Ifthebanking

systemshowssignsofbeingundersuppliedwithliquidity,theSNBprovides

liquiditythroughshort-termmoneymarketoperations.If,however,thebanking

systemisoversuppliedwithliquidity,theSNBabsorbsliquidityviashort-term

moneymarketoperations.

Inorderforabanktomaintainitssolvency,itmusthavesufcient

liquidityatalltimes.Abanksmostliquidassetsaresightdepositsheldatthe

SNB,sincetheycanbeusedimmediatelyforpaymenttransactionsandare

deemedtobelegaltender.Inaddition,banksholdsightdepositsattheSNB

to satisfy minimum reserve requirements and as liquidity reserves. Sight

depositsattheNationalBankbearnointerest.

The individual nancial market participants adjust their liquidity

positionsonthemoneymarket.Bankswantingtoplacefundsonashort-term

basisprovideliquidityintheformofaloantootherbanksthatrequireshort-

termrenancing.Theseloanscanbegrantedonasecuredorunsecuredbasis.

Adisruptioninthemoneymarketsimpairstheliquidityadjustmentprocess

betweenthemarketparticipantsandcanthreatenthesolvencyofthebanks.

Aftermeasurestakentocounterthemassiveupwardpressureonthe

Swissfrancdidnothavethedesiredeffect,on6SeptembertheSNBseta

minimumexchangerateofCHF1.20pereuro.Indoingso,theNationalBank

madeitclearthatitwouldenforcethisminimumratewiththeutmostdeter-

minationandwasprepared,ifnecessary,tobuyforeigncurrencyinunlimited

quantities.

Background

Basicsofmoneymarketsteering

Signicanceofsightdepositsandmoneymarket

Introductionofminimumexchangerate

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2.2 Monetarypolicyinstruments

Withinitssetofmonetarypolicyinstruments,theSNBdistinguishes

betweenopenmarketoperationsandstandingfacilities.Inthecaseofopen

market operations, the SNB takes the initiative in the transaction. Where

standingfacilitiesareconcerned,whichincludetheliquidity-shortagenanc-

ingfacilityandtheintradayfacility,itmerelysetstheconditionsunderwhich

counterpartiescanobtainliquidity.

Regular open market operationsinclude repo transactionsand the

issuanceofSNBBills.Furthermonetarypolicyinstruments,suchasforeign

exchangeswapsandforeignexchangetransactions,areavailableifnecessary.

TheSNBconductsitsopenmarketoperationsintheformofauctionsor

bilateraltransactions.Transactionsonthemoneymarketareusuallyconcluded

viatheelectronictradingplatformofEurexZurichLtd.

Repoauctionsareconductedbyvolumetender.Inthistypeofauction,

eachcounterpartysubmitstotheSNBanofferfortheamountofliquidityit

iswillingtoprovideorrequestforagivenreporate.Ifthetotalamountof

allthe offers exceeds the SNBs predetermined allotmentvolume, the SNB

reducestheamountsofferedproportionately.

Asarule,SNBBillsareissuedintheformofavariableratetender

auctionwithallotmentaccordingtotheAmericanmethod.Inthistypeof

auction,theSNBscounterpartiessubmittheirofferscomprisingtheamount

ofliquiditytheyarewillingtoprovideandthepriceatwhichtheywilldo

so.Eachcounterpartymaysubmitasmanyoffersasitwishes,andmayalso

varytheinterestratefromoneoffertoanother.TheSNBobtainsliquidity

fromauctionparticipantsthathavebidbeloworatthehighestinterestrate

acceptedbytheSNBattheinterestratestatedintheindividualoffer.

Byplacingoracceptingoffersforrepotransactionsontheelectronic

tradingplatform, the SNBis able toinuence interestratesinthe money

marketatalltimes,andnotjustatthetimeoftheauctions.Suchbilateral

repotransactionscanbeusedforbothprovidingandabsorbingliquidity.

Openmarketoperationsandstandingfacilities

Executionofmonetarypolicyoperations

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Inprinciple,allbanksdomiciledinSwitzerlandandthePrincipalityof

Liechtensteinareadmittedascounterpartiesinmonetarypolicyoperations.

Otherdomesticnancialmarketparticipantssuchasinsurancecompanies,

as well as banks domiciled abroad, may be admitted to monetary policy

operationsprovidedthisisintheSNBsmonetarypolicyinterestandthesaid

institutionscontributetotheliquidityonthesecuredSwissfrancmoney

market.In2011,160domesticandforeignbanksaswellassixdomestic

insurancecompanieswereactiveasSNBcounterparties.

TheGuidelines of the Swiss National Bank (SNB) on Monetary PolicyInstruments (cf.www.snb.ch, The SNB, Legal basis, Guidelines and regulations)

containexplicitinformationwithregardtotheSNBsscopeofbusinessas

setoutinart.9NBAanddescribetheinstrumentsandproceduresusedby

theSNBfortheimplementationofitsmonetarypolicy.Theyalsodenethe

conditionsunderwhichthesetransactionsareconcludedandwhichsecurities

canbeusedascollateralformonetarypolicyoperations.

Openmarketoperations

Inthecaseofliquidity-providingrepotransactions,theSNBpurchases

securitiesfromabank(orothermarketparticipantadmittedasacounter-

party)andcreditstheassociatedsuminSwissfrancstothecounterpartys

sightdepositaccountwiththeSNB.Atthesametime,itisagreedthatthe

SNBwillresellsecuritiesofthesametypeandquantityatalaterdate.The

bankpaysinterest(repointerestrate)totheSNBforthetermoftherepo

agreement. In the case of liquidity-absorbing repo transactions, theSNB

sellssecuritiestoabankanddebitstheassociatedsumtothelatterssight

depositaccount.Atthesametime,itisagreedthattheSNBwillrepurchase

thesecuritiesfromthebankatalaterdate.TheNationalBankpaysinterest

(repointerestrate)tothebankforthetermoftherepoagreement.

Fromaneconomicperspective,arepoisasecuredloan,withtheSNB

actingascashproviderinthecaseofaliquidity-providingoperationandthe

commercialbankactingascashproviderinaliquidity-absorbingtransaction.

Thereporate,thevolumeandthetermoftheindividualoperationsdepend

onmonetarypolicyrequirements.Thetermsofrepotransactionsvaryfrom

oneday(overnight)toseveralmonths.

Eligiblecounterparties

Guidelinesonmonetarypolicyinstruments

Liquidity-providingandliquidity-absorbingrepotransactions

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TheissuanceofitsowndebtcerticatesinSwissfrancs(SNBBills)

allowstheNationalBanktoquicklyabsorblargeamountsofliquidity.TheSNB

canalsorepurchaseSNBBillsviathesecondarymarket,inordertoincrease

thesupplyofliquiditytothemarketwherenecessary.SNBBillsareeligibleas

collateralandcanthereforebeusedinSNBrepotransactions.BuyersofSNB

Billscansellthebillstoothernancialmarketparticipantswhetherbanks

ornon-banks just like othersecurities.SNBBills donotrepresentlegal

tender andcannot thereforebe used bybanks tosatisfyminimum reserve

requirements.

Standingfacilities

Tobridgeunexpectedliquiditybottlenecks,theSNBoffersaliquidity-

shortagenancingfacility.Inorderforabanktoobtainliquiditythroughthis

facility,theNationalBankmustgrantalimittobecoveredby110%collat-

eraleligibleforSNBreposatalltimes.Eachcounterpartyhastherightto

obtainliquidityuptothelimitgranteduntilthefollowingbankworkingday.

Theliquidity-shortagenancingfacilityisutilisedintheformofaspecial-

raterepotransaction.Thespecialratelies0.5percentagepointsabovethe

callmoneyrate.ThebasisistheSARON(SwissAverageRateOvernight)ofthe

currentbankworkingday.Thespecialrateisvaliduntil12.00noonofthe

followingbankworkingdayandisatleast0.5percentagepoints.

Attherequestofnancialmarketparticipants,in2011thelimitsfor

theliquidity-shortagenancingfacilitywerereducedbyatotalofCHF4.6

billiontoCHF32.9billion.Bytheendoftheyear,91nancialmarketpartici-

pantshadbeengrantedalimit(previousyear:85).

Duringtheday,theSNBprovidesitscounterpartieswithinterest-free

liquidity(intradayliquidity)throughrepotransactions,soastofacilitatethe

settlement of payment transactions via Swiss Interbank Clearing and the

settlementofforeignexchangetransactionsviaContinuousLinkedSettlement,

themultilateralpaymentsystem.Thecashamountsdrawnmustberepaidby

theendofthesamebankworkingday,atthelatest.Intradayliquiditycannot

beusedtocomplywithminimumreser verequirementsorliquidityrequirements

underbankinglaw.

IssuanceandrepurchaseofSNBBills

Liquidity-shortagenancingfacility

Intradayfacility

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Othermonetarypolicyinstruments

Inaccordancewithart.9para.1NBA,theSNBhasothermonetary

policyinstrumentsatitsdisposal.Theseinclude,inparticular,spotandforward

foreignexchangetransactions,foreignexchangeswaps,thepurchaseandsale

ofsecuritiesdenominatedinSwissfrancsandderivativesonreceivables.

Inaforeignexchangeswap,thepurchase(sale)offoreigncurrencyat

thecurrentspotrateandthesale(purchase)oftheforeigncurrencyatalater

datearesimultaneouslyagreed.Foreignexchangeswaptransactionscanbeconductedviaauction(volumetender)oronabilateralbasiswithawiderange

ofcounterparties.

Beforetheintroductionofrepotransactionsin1998,foreignexchange

swapsweretheSNBsmostimportantmonetarypolicyinstrumentforsupplying

themoneymarketwithliquidity.ToacceleratetheincreaseinSwissfranc

liquidityinAugust2011,theSNBdecidedon10Augusttoalsoconductforeign

exchangeswaptransactions.

Inordertofullitsmonetarypolicymandate,theNationalBank

maypurchaseandsellforeigncurrencyagainstSwissfrancsonthenancial

markets.

2.3 CollateraleligibleforSNBrepos

Inaccordancewithart.9NBA,theSNBmayenterintocredittransac-

tionswithbanksandothernancialmarketpart icipants,onconditionthat

sufcientcollateralisprovidedfortheloans.Insodoing,theSNBprotects

itselfagainstlossesandensuresequaltreatmentofitscounterparties.Art.3

oftheGuidelines of the Swiss National Bank (SNB) on Monetary Policy Instru-

mentsoutlinesthetypesofsecuritieseligibleascollateralforSNBtransac-

tions.OnlysecuritieswhichmeetthecriterialistedintheInstruction Sheeton Collateral Eligible for SNB Repos (cf. www.snb.ch,The SNB, Legal basis,

Guidelines and regulations),andwhichappearinthelistofcollateraleligible

forSNBrepos,areadmittedforrepotransactions.

Foreignexchangeswaps

Purchaseandsaleofforeigncurrency

Legalbasis

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TheSNBpursuesanopenaccesspolicyandallowsbanksdomiciled

abroadtoparticipateinitsmonetarypolicyoperations,too.Ittherefore

acceptsascollateralnotjustSwissfrancsecurities,butalsosecuritiesdenom-

inatedinforeigncurrencies.Oneconditionisthattheissuerofsecuritiesis

domiciledinSwitzerlandoramemberstateoftheEuropeanUnionorthe

EuropeanEconomicArea.Theminimumrequirementswithregardtocollateral

inforeigncurrenciesarehigherthanforthosedenominatedinSwissfrancs.

In2011,95%ofthesecuritieseligibleascollateralforSNBoperationswere

denominatedinforeigncurrenci

Documents

SNB AR 2011